Top Year End Financial Planning and Tax Tips
The decorations are up.
The holiday marketing campaigns are in full swing.
People are becoming more edgy by the day…
Yup, the holidays are coming – so why not get some top year end financial planning and tax tips while you’re at it!
All jokes aside I’m very much looking forward to the holidays!
While I certainly intend to enjoy some much-needed down time away from work, I also believe December is a great time to start thinking about ushering out some old financial habits and bringing in some new, improved financial planning practices and tax tips it comes to our personal finances.
On that note, here are my top year end financial planning and tax tips for this year!
Top Year End Financial Planning and Tax Tips
Oh, and you don’t have to take my word for it. This year, I’ve enlisted some tax tip help. My friend Neal Winokur (a not-so-grumpy in reality accountant) and author of The Grumpy Accountant is back with me to share those financial planning and tax tips for you too.
And keep reading…
At the end of this post, Neal is kind enough to help Canadians with The Grumpy Accountant better navigate our complex Canadian tax system – by offering all My Own Advisor readers a huge discount off The Grumpy Accountant from his site.
Neal, welcome back to the site and thanks very much for that major discount to My Own Advisor readers. I hope many Canadians tax advantage of your book for tax tips.
Thanks Mark, a pleasure to help!
Neal, let’s start with our first tax tip question: should investors consider realizing a capital loss? If so, when and how does that work?
In the past I’ve sold some non-registered investments during the tax year. When I did that, I needed to calculate my capital gains or losses on any transaction. When disposing of a security, the sale will be deemed to have taken place on the settlement date and assuming you have a two to three-day settlement period which is common with most discount brokerages, to employ a “tax loss” selling strategy, you must make sure your transaction(s) settle no later than December 27. Thoughts?
Capital loss farming! A favourite Canadian pastime before December 31st! I should first mention that those considering doing this should ensure they execute the trade with enough time for it to settle by December 31st to realize the loss in the current year – to your point above Mark.
In order to decide on whether this is a good idea or not, I would tell people “don’t make investment decisions based on tax considerations!” If you’re holding a particular stock and you have an unrealized loss, if you believe the stock will continue to decrease in price, then why would you hold on to it? And if you believe the stock will increase in price, why would you sell it! It’s true you can buy the stock back after selling it, but you must wait at least 30 days. Otherwise, the CRA will deny the capital loss! And what happens in those 30 days is anyone’s guess.
Look at what happened over the past two years with COVID. Nobody could have predicted any of this (market return) and nobody predicted the stock market would reach all-new highs during the pandemic. (Thank you to the U.S. Federal Reserve and your zero-interest rate policies and “quantitative easing”!).
All kidding aside to some degree, my point is – the markets are completely unpredictable. Selling a stock for tax purposes makes no sense to me. It only makes sense if you were going to sell the stock anyways. But if you want to hold on to the stock because you are earning and reinvesting dividend income, why would you sell? In conclusion, don’t make investment decisions based on tax considerations! The flipside of this question also arises when people ask, “I have a large unrealized gain on a particular stock, and I really want to sell the stock but I’m reluctant to because I’ll have to pay tax.” Well, if you want to sell the stock, sell it! If you think it will go down, why hold on to it and lose all your money. Don’t make investment decisions based on purely tax considerations!
Such great points. Neal, what are your favourite tax tips to be efficient in any tax year? An example may include when to take RRSP withdrawals, at the lowest possible tax rate I assume?
You bet Mark.
To be tax efficient in any particular year, there are many things that can be done. Firstly, always trying to maximize one’s TFSA contributions is a no-brainer. I know you write about this often.
Further Reading:
I’ve maxed out my RRSP and TFSA. Now what? How should I invest?
A reminder you must manage the RRSP-generated tax refund when comparing the RRSP vs. TFSA debate!
Secondly, if you were thinking of withdrawing from your RRSP, then, of course, wait until you are in a year in which you have zero or a low amount of other income.
Remember if you want to claim the RRSP deduction for the 2021 tax year, you must contribute to your RRSP by February 28, 2022.
Simple and smart. OK, what about making a charitable donation – can that lower your taxes owing and if so, how?
Yes, the charitable donation tax credit is one of the most popular tax credits out there. I cannot tell you how many emails I receive in December from every charity in the country asking for donations. They know people love getting their donation tax receipts so they spam everyone as close to the end of the year as possible! By the way, if you want to check your preferred charities to see how much money they spend on administrative expenses versus actual operations, you can look it up on the CRA website! Can you believe it? The CRA is good for something!
Here is the link:
Generally speaking, the higher your income is, the more the donation tax credit will be worth to you. If you are in the highest tax bracket in Ontario each dollar you donate to a registered charity will save you 53.53% of tax. But the total amount you are allowed to claim in a year is limited to 75% of your net income. Unclaimed amounts can be carried forward for five years.
As an aside, I sometimes wonder if the government abolished all forms of forced taxation and asked for voluntary donations instead, and each government department did their own GoFundMe Campaign and disclosed their expenses online, would people donate? Honestly, I think they would! But who knows!
OK Neal, a follow-up. What about donating shares from a taxable account? Is that also a good way to make a financial donation and how does that work?
If you hold publicly traded shares with an unrealized capital gain in a non-registered account, donating those shares directly to a registered charity can be extremely tax-effective. You will receive a donation tax receipt for the fair market value of the shares on the date of the donation. In addition, the capital gain will be completely exempt from tax! So, this is a great way to realize some tax savings and contribute to the fine work that Canadian charities do.
Let’s look ahead. When should investors consider making their TFSA contributions? Early in the year? What are your thoughts on lump-sum investing and DCA (dollar cost averaging)?
People should make their TFSA contributions as soon as humanly possible. The second you wake up on New Years Day before even wishing good morning to your spouse or other loved ones, before preparing your coffee to cure your New Years Eve party hangover, before even going to the bathroom and brushing your teeth and relieving yourself, go to your computer, login to your bank account online and make your TFSA contribution! Do not delay! Time value of money!
Remember, money is worth more to you today than it is tomorrow. So, the longer the money is invested, the more returns you will earn over the long term due to compound investing. Of course, I urge you to double, and triple check your TFSA contribution room before contributing. The amount showing on the CRA’s website could be out of date. I recommend everyone keep a spreadsheet where they record every contribution and withdrawal. You can also look at your December TFSA statements to see the “year-to-date” withdrawals and contributions each year to verify your contribution room. For 2022, the new contribution limit will be $6,000. This remains unchanged and has been $6,000 for 2019, 2020 and 2021. I guess the government thinks there has been no inflation since 2018!
Further Reading:
Here are great things you can always do with your TFSA!
In terms of lump-sum investing and dollar-cost averaging, both have their place. Lump-sum investing is great due to the time value of money and the effects of compounding over the long-term as I described above. Dollar-cost averaging is great too especially if you like automatic dividend reinvestment programs (DRIP). Generally speaking, if you have a very long-term investment horizon and can tolerate more risk, it’s likely beneficial to have as much money invested as soon as you can. The longer the money is invested, the better! But dollar-cost averaging can you serve people as well if you are setting aside a portion of your income every month for investment purposes. Both strategies can be used in conjunction with each other.
Totally agree – lump-sum investing is usually the way to go. Neal, running My Own Advisor takes some work – including my incorporation efforts. What incorporation or small business organizational work would you recommend at year-end?
Is that a trick question? Whether one is incorporated or a sole proprietor, organizational work must begin BEFORE year-end!!! I cannot stress this enough. In my accounting firm, we insist that all our clients use our monthly bookkeeping system. If are you waiting until the end of the year to begin organizing your accounting and tax information, it’s too late!!! Develop a system for yourself using any of the gazillion online apps and tools available to help automate your bookkeeping or hire a professional to do this for you. Sole proprietors should ensure they are tracking all their revenue and all their expenses throughout the year. Every receipt for every expense should be kept, whether a paper copy or a scanned copy. If one is collecting GST/PST/HST, one should keep track of that as well and set aside the sales tax that they collect. One should also set aside a portion of all their revenue to pay their income tax when the time comes.
Incorporated business owners have an even greater compliance burden. In addition to all the requirements listed above for sole proprietors, these business owners must also track every transaction going through the corporate bank account in order to prepare a “balance sheet” at the end of the year. The T2 corporate tax return requires taxpayers to fill in both a balance sheet (Schedule 100) and an income statement (Schedule 125). All withdrawals the owner of the corporation makes and all deposits an owner puts into the corporation must be tracked as well. This is known as “shareholder loans”. Any withdrawals by the owner for personal use must be recorded as salary or dividend to the owner. Salaries must have Canada Pension Plan (CPP) and income tax withholdings and payments to the CRA. Dividends can be complicated to calculate due to the gross-up and dividend tax credit. Salaries must be reported on a T4 slip and dividends on a T5. Complying with all these requirements is no easy feat! This ridiculous complexity is my pet peeve and causes me much anguish and is the reason why I wrote The Grumpy Accountant. Due to all this work involved for corporate owner-managers, I highly recommend ensuring your books are being kept up to date throughout the year! Have the bookkeeping done monthly, including monthly bank reconciliations and credit card reconciliations. The fees are well worth it because if you have a good tax advisor, they can do proper tax planning for you throughout the year, pre-emptively BEFORE the end of the year! This is so important.
Now all that being said, if you haven’t done any of the above, and you have a shoebox of receipts, well, good luck to you! But it’s never too late to start and get organized. Use an app like Dext to scan in all your receipts or get yourself QuickBooks Online and connect your bank account and find someone who can help you learn how to use it or hire a professional.
Further reading with Neal and Mark:
How should you invest inside your corporation?
If you run a corporation, should you pay yourself a salary or dividends?
Finally, any other words of wisdom for Canadians to be tax savvy this year and leading into a new year?
For the 2021 tax year specifically, remember to claim the home office deduction if you were working from home. The simplified method that was created in 2020 is being continued for 2021 as well. If you received covid benefits like CERB, CRB, CRSB, CRCB, these are TAXABLE and you will receive a T4A slip from the wonderful government. The amounts on the T4A slips must be reported in your income. Any income tax deducted at source from these benefits will also show up on the T4A slip and remember to include that in your tax return as well so you get credit for those income taxes already paid. If you owe additional tax due to receiving these benefits and cannot pay the tax bill by April 30th, 2022 for 2021, the CRA will likely offer interest relief for 12 months if your income was below $75,000, the same way they did for 2020. I have not yet seen a formal announcement on this but I would assume they will extend this for the 2021 tax year as well but we have to wait for them to release more information.
We just came out of an election campaign where there were many expensive promises made by the Liberal party who has now formed a minority government. We have to wait and see for actual legislation to be passed to see if there will be any major changes to our tax system in the coming months.
Top Year End Financial Planning and Tax Tips Summary
A big thanks to Neal Winokur from me, CPA, who started his practice in 2013 and his grumpiness has grown ever since – although he’s actually a very great guy – for his contributions again to the site.
Neal is an active blogger, several of his articles have been published in the National Post. Neal feels a moral obligation to speak out against the inherent flaws, unfairness and needless complexities that define Canadian tax. His dream is for the Canadian tax system to be massively simplified to the point where his job as a tax accountant would no longer exist. His wife won’t be happy but as taxpayers Neal feels we’ll be all better off!!!
Some other year end tax tips or considerations from Neal:
- Revisit your asset allocation and location. While you don’t want the tax tail to wave the investment dog, asset location – what assets should go inside what accounts to be tax efficient – is also important to consider.
- Review your insurance coverage. Every fall/winter, I get letters from my combined home and auto insurance company to highlight new or changed premiums to be paid. I’m not thrilled about any insurance premium increases mind you, but rates in general are always going up over time. So, upon renewal letters, I think it’s a great time to review your insurance coverage – ensuring you’re getting the right coverage for your valuable buck.
- Collapse your RRSP and turn that into a RRIF. I hope you know from my site that the use of the RRSP is an outstanding tax-deferred account for wealth-building. If you are turning or turned age 71 this year, you must collapse this account by December 31st in the year you turned 71. By turning your RRSP into a RRIF, you can continue to get the tax-deferred growth benefits for assets inside the RRIF while some forced withdrawals slowly take place over time.
- Make some RESP contributions! A Registered Education Savings Plan (RESP) is an outstanding way to save for a child’s or grandchild’s post-secondary education. Your child or grandchild, as the beneficiary, can receive up to the lifetime contribution limit of $50,000 – and that’s just contribution room! Just by making RESP contributions, you may be eligible to receive the Canada Education Savings Grant (CESG) that will match 20% of the first $2,500 in annual contributions – to a maximum grant of $500 ($2,500 x 20%) per beneficiary, per year. That a bunch of free government money! I would strongly consider contributing to the RESP by December 31st if you haven’t already maximized your contributions year to date. Remember the RESP is a tax-deferred plan. Eventually contributions within the RESP will be taxed in your child’s or grandchild’s hands, but I doubt they’ll have tax rate as you when benefits are realized from the account.
Get a copy of The Grumpy Accountant with a huge discount!
Neal is no Grinch! Thanks to Neal, all My Own Advisor readers receive a massive discount with no expiration off The Grumpy Accountant.
Just include the promo code “MOA” when you purchase the full PDF e-book from Neal’s site.
In doing so, you’ll get a whopping 30% discount!
Enjoy!!
Disclosure – My Own Advisor is not a tax whiz however I have learned many tax tips over time. This post does not include any personal tax advice. If ever in doubt about any tax strategies for your situation please consult a tax professional before making any major financial decision.
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
For my 2022 TFSA contribution, I plan on transferring $6K of shares from my non-registered account to my TFSA account (both are in Questrade). The shares are RCI.B (Rogers), which, with all the shenanigans, the price is pretty much on par with when I purchased them, so little gain or loss (probably not worth attempting to harvest).
Neal or Mark, if I were to initiate the transfer on December 29th (or 28th?), would CRA consider that an over-contribution in 2021? While on the topic, if I were to buy stock on the 29th, with the settlement date being three days later, would that count as a 2021 over-contribution?
Not tax advice Bob but I would personally wait to do any in-kind or in-cash TFSA contribution on or after January 1. This way, no concerns.
Thinking about this more, of course, to buy stocks on the last day of the year in the TFSA, I have to transfer the money into the account first. That is instant, so it would be an over-contribution in 2021!
I’ll wait until 2022 to initiate the in-kind transfer. Thanks Mark
Good call, Jan. 1 or later. The market shouldn’t go too sideways in a few days around the holidays in particular. Traders and institutional investors need a break too 🙂
Ha
Mark
Great post. Lots of helpful tax tips.
For donations, Neal says “Generally speaking, the higher your income is, the more the donation tax credit will be worth to you.”
Is that accurate? I thought that applies to deductions like childcare or RRSP contributions but not credits like donations. Appreciate any clarification. Thanks!
Neal might be speaking about certain tax deductions in particular, but I see your point Eric!
Mark/Neal – thank you for this post and for the discount. Just purchased the book and look forward to reading it.
Great stuff.
Mark
The book can be purchased only with PayPal? It is not allowing to click on the credit card option.
Thanks Bindu, I will have to ask Neal to reply to this one. I know he will. Will flag for him!
Mark
Once you click on Paypal you will see an option to pay with a card
Thanks for that, agreed, and just also replied to Bindu once confirmed with Neal 🙂
Hi Bindu,
From Neal:
“They should be able to pay with their credit card, they click on the paypal link but then paypal allows people to pay with their CC without having a paypal account
I in fact tested it like that and it worked”
🙂
Thank you, Mark. that is good to know. Will buy it soon.
Great, enjoy and ask Neal lots of questions 🙂
For years I did my own taxes and felt I was doing a good job. But not many years ago I finally decided to have my taxes done by an accountant (a friend). Yes, I paid more than using those do it yourself tax software programs, but I found that he really was able to identify items or areas which I had not picked up on. Did he save me money, I think so, but even if not, I’m much more confident that my filings won’t come back to bit me.
Very reasonsable approach Henry and there are certainly some great tax accountants I have worked with in the past. I continue to do my own personal taxes but for my T2 I don’t mess with that. I have an accountant help me out with any corporate filings.
In my humble opinion, we should have a tax system that is so ridiculously simple, no one should ever need a “tax accountant” or “tax advisor”!
Amen 🙂
Thanks so much Mark for all your tax tips, etc. BTW, do you know what is the amount of net income allowed before the “OAS claw-back” provisions kick in for 2021?? Any helpful tax tips on how to avoid claw-backs?
Wish you & family a safe and happy holiday season. May your financial freedom come much sooner.
To your wealth and good health,
Cheers.
Ken
Hey Ken,
Should be found here, one of my to-go sites started by a couple of accountants:
https://www.taxtips.ca/seniors/oas-clawback.htm
Neal might have more insights, but I would suggest considering the following when it comes to avoiding OAS clawbacks:
1. Consider keeping any personal net income below ~ $80K individual threshold.
2. Consider withdrawing RRSP/RRIF assets whereby you achieve #1.
3. Consider delaying OAS until age 70, to achieve #2 – drawing down personal assets first/where relevant.
4. Take advantage of selling assets in non-reg. account for capital gains (an efficient form of taxation) before taking OAS – therefore moving any non-reg. assets inside TFSA or RRSP assets inside TFSA for future tax-free income while earning OAS (*TFSA income does not force any OAS clawbacks 🙂
5. Consider income splitting in your 60s. Splitting of pension and RRIFs between spouses can lower individual income for either spouse and help them limit or avoid OAS clawbacks.
6. Use a younger spouse’s age for RRIF.
And more!
Very kind words Ken and I wish you and family well.
Mark
I agree with all of Mark’s suggestions. The goal of Canadian retirement, from a tax perspective, is keep your taxable income as low as humanly possible for as many years as humanly possible. I would add – for younger people: maxing out your TFSA each year is so important for this purpose because in retirement, TFSA withdrawals are tax-free and do not increase taxable income.
Since New Years Day is always a holiday and January 1, 2022 falls on a Saturday, the first banking day of 2022 is Tuesday January 4. So you don’t have to jump out of bed on January 1st to make your TFSA contribution. It can wait until Tuesday. (I know Neal was making a being humorous!).
For may years have made both my TFSA and RRSP contributions on the first banking day of the year. Just make sure you have built up sufficient cash in your account to make the contributions. This way they earn tax free and tax deferred income for the longest period of time.
Yes, he was 🙂
Smart stuff Roger and I will have my money ready for the TFSA, to contribute, on January 1 or 4 🙂
Mark
Good point.
I still do it on Jan 1st because I’m a bit of a nutcase!
I wuld also add that people must double and triple check their TFSA+RRSP contribution.
FYI RRSP contributions can be made March 1st or 2nd or 3rd depending on the year for the next year. Meaning Feb 28, 2022 is the deadline for RRSP contributions to be deducted in 2021. Starting March 1, 2022 you can make RRSP contributions for the 2022 tax year if you want to be super-early.
Mark, I have just prepared my form for my RRSP withdrawal. I have been doing withdrawals for five years or so, given that my income is very low. Before that my husband could deduct me as a dependant.
One thing I learned two years ago is to move some of the RRSP into a RRIF, because there is no fee for a RRIF withdrawal and previously I was having to pay a fee for a lump sum withdrawal from the RRSP. Of course now that my money is all self-directed and no advisor involved, it is all much easier. I much prefer it this way! No one to blame for any losses except myself (or bad luck).
BTW, I could fax in the withdrawal form, but will have to use the mail. I no longer have fax at home, because I now have Ooma phone service, which cannot accommodate fax. Thanks to you, I have already saved a lot of money by cancelling my home phone service and using Ooma instead. The system you use (can’t remember the name) wasn’t available here, but I can recommend Ooma to others.
Very true – some brokerages charge a fee for RRSP withdrawals vs. RRIF.
Great to hear about home phone. I use Fongo but Ooma is a great choice as well. 🙂 Keep us posted on your countdown!
Barbara, do you use a discount broker? If so is it not possible to make a RRSP withdrawal without forms- a simple online DIY?
I am in 4th year of doing this. Simple, pretty well same as transferring money between accts.
Hi RBull,
If I wanted to, I could do a RRSP or Spousal RRSP registered withdrawal online very simply. However,I am not sure why, but this option does not come up for a RRIF withdrawal. Not sure if that is a glitch for me or intentional? These accounts are with iTrade.
Ok that makes sense now- for an RRIF. Your post mentioned RRSP so that’s why I suggested the online withdrawal.
I have a LIF set up last year and also had to do some paperwork for that. A letter is sent out confirming the amount based on year end balance for my annual minimum withdrawal the next spring. I’m sure you get the same.
Good reminders and tips list Mark.
Good suggestion Randy re deductibles. On insurance same can be said for auto insurance re deductibles and raising them to save money.
Just a couple of points on insurance from a retired guy. Home insurance policies can be changed at any time. A lot of people think it has to be done at the policy renewal date. No it doesn’t. You get a refund from one and pay the other. No biggee. Increasing the deductible is also a great way to save money. Why have a $500 deductible when you know you are only going to make a claim for a large loss? Everyone knows that your premiums go up with a claim, so why not cut your premium by going to a $2,500 or $5,000 deductible? Also interesting to know that in my experience the $2,500 deductible seems to be the best savings value. Not much more savings going to $5,000. Finally do you really need life insurance when you are retired and the mortgage is paid off? It won’t be much of a hardship for your spouse when s/he gets 2/3rds of your pension, all of your TFSA’s, all of your RRSP’s and doesn’t have to feed or entertain you any more! Plus you can sleep better at night knowing that you aren’t worth more dead than alive.
We went from $500 to $1000 deductible a few years ago. To tell the truth I never asked if there was a higher option. It’s now on my “to do” list to check out increasing it to $2500. I cancelled all the ordinary life insurance recently and just kept the pension sponsored one. Should probably get rid of it as well.
“just kept the pension sponsored one.”
Just checked on this. The beneficiary of both policies is deceased so I will add doing something about this to the “to do” list. Have to decide whether to outright cancel them or designate one of the endowment funds as beneficiary.
“Finally do you really need life insurance when you are retired and the mortgage is paid off?”
Totally agree. If you have assets, a paid off home, I’m not sure it makes too much sense to have a huge life insurance policy – maybe better to self-insure? Again, everyone is different.
BTW – great comment 🙂
Randy, I found that the home insurance people love it when you phone and ask questions. Someone has actually read their policy!! I got several useful tips for reducing my premium, one that surprised me is the reduction when you are mortgage free. I had not thought about a deductible as high as $2,500, I will note that.
Regarding life insurance…..I have this awful feeling that if I cancel either my husband’s or my policy, that within a couple of months we would get a terminal diagnosis….so if I keep our policies we will keep our health. Sounds silly, but I lost both my parents at a youngish age. How does one get over superstitions like that? The life insurance premiums keeps going down every year (policy through employer, so group rates), but the disability insurance premiums keep rising, just got the notice this week.
Keep in mind with life insurance – even if you don’t need life insurance, if you are swimming in piles of cash and your TFSA, RRSP are maxed out, you have your principal residence, you have a ton of non-registered investments and your wealth continues to grow, you obviously don’t ‘need’ life insurance for insurance purposes. However, it can be a great tax-savings tool for estate planning purposes as life insurance proceeds are tax-free to the estate/beneficairies. Something to consider..
I hadn’t considered the value of continuing our life insurance policies in regards to estate planning. For us, it was that when one of us dies, it’s a triple-whammy; loss of 1/3rd work pension, OAS, and a foreign pension. I also suspect there would be a drop in total CPP too.
Ready to contribute to RRSP, TFSA and RESP. With RRSP, I might just transfer some equities in kind, and RESP, it’s coach potato. Still wondering what I should do with TFSA though. Any ideas?
Banks look attractive right now but I am already overweight with financials.